Malawi's minister of finance has denied reports that at least four major donors have suspended aid to the impoverished southern African state citing widespread corruption and economic mismanagement.

Mr Mathews Chikaonda told the BBC's Focus on Africa programme that as far as the government was concerned, "there is no problem with the donors" and he called the reports "baseless rumours".

Donors say the money is not going where it is supposed to go

But a copy of a leaked memorandum sent to President Bakili Muluzi dated 25 September 2001 and obtained by BBC News Online says both the European Union and the United States have suspended development aid.

Mr Chikaonda later admitted at a rowdy press conference to writing the memo but accused journalists of stealing " a very confidential memo."

The minister's letter referred to "some sad developments which have resulted in some donor funds that were factored into the 2001/2002 being cancelled for various reasons".

It says the EU has not only suspended the release of 15m Euros ($13m) but has also demanded a refund of 7m Euros already disbursed.

Problems ahead

He told the programme that there was a communication to the president spelling out "potential problems, unless action is taken in a number of areas".

But the minister would not elaborate on what these problems might be.

However under the heading "Donor funding" his letter said that the EU delegation had discovered anomalies while carrying out an audit, discovering that funds had been used for projects outside any bilateral agreement.

The delegation's economic advisor, Theo Kaspers, said the EU had written a fresh memorandum of understanding with conditions which had to be signed.

The United States Government, through the US Agency for International Development (USAID), has also diverted at least $6m of the $7m meant for Malawi to another country.

Bad timing

It said the move came in response to the Malawi Government's decision to suspend its privatisation programme.

Other donors, notably Britain, have also put on hold development aid to Malawi because of corruption, mismanagement and political uncertainty.

Denmark, whose envoy Orla Bakdal was forced to leave after the Danish embassy questioned how its money was being used, has also scaled down sponsored projects in Malawi.

But the finance minister told journalists that the envoy was recalled following Malawi government's complaint that he was rude to President Muluzi.

The suspensions of aid could not come at a worse time for Malawi.

Budget would not balance without donor funds

The government needs to imports thousands of
tonnes of maize to offset the worsening food crisis.
In his letter, Mr Chikaonda recommended that the cabinet be informed on the developments to discuss other ways of
raising money.

He also suggested that President Muluzi should take him along to Brussels to discuss developments with the EU.

Meanwhile, the practical effects of the aid suspensions are already being felt.

New salaries for teachers, the police and medical workers - which President Muluzi promised last June - have yet to materialise, already fuelling sporadic strike actions.